Yahoo Finance M.D.C. Holdings (NYSE:MDC) Is Achieving High Returns On Its Capital
What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in M.D.C. Holdings' (NYSE:MDC) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for M.D.C. Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = US$924m ÷ (US$5.3b - US$803m) (Based on the trailing twelve months to September 2022).
Therefore, M.D.C. Holdings has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 17% earned by companies in a similar industry.
Check out our latest analysis for M.D.C. Holdings
In the above chart we have measured M.D.C. Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for M.D.C. Holdings.
The Trend Of ROCE
The trends we've noticed at M.D.C. Holdings are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 20%. Basically the business is earning more per dollar of capital invested and in addition to that, 101% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
The Bottom Line
All in all, it's terrific to see that M.D.C. Holdings is reaping the rewards from prior investments and is growing its capital base. Considering the stock has delivered 38% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
One more thing, we've spotted 2 warning signs facing M.D.C. Holdings that you might find interesting.
M.D.C. Holdings is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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